19 November 2015

Summary of SuperInvestor 2015 Main Conference Day 2

SuperInvestor 2015 rolled on today, with topics covered including capital deployment, future sources of capital, continuing outperformance and the one that is at the back of the industry's collective mind: the next correction. If Day 1 was focussed on past lessons and returning to fundamentals, then Day 2 was about looking forward.

How can we deploy capital profitably when, as we reported yesterday, the current macroeconomic environment is driving high prices? This was the question faced by the first panel of the day and it is a big one – the private equity industry reached $1.3 trillion in dry powder earlier this year and the capital continues to flow in. John Hartz (Managing Partner, Inflexion Private Equity Partners) suggested that, if buyers don't like the prices the market is offering, they should make their own deals. By adopting a direct origination strategy, firms can identify businesses not on the market and make an offer based on absolute value rather than market (relative) value. But firms shouldn't expect a quick fix, Andrea Bonomi (Senior Partner, InvestIndustrial) warned, as this strategy requires a significant investment of resources over time and the building of relationships with stakeholders, such as corporates and brokers.

The near-global domination by defined contribution (DC) pension plans will pose a major threat to fundraising within the next 5-10 years, in the opinion of Kevin Albert (Managing Director, Pantheon). The widespread proliferation of DC plans has been driven by employers' desire to relieve themselves from responsibility for maintaining defined benefit (DB) plans and employees' attraction to the portability and investment choice that they offer. This has led to a large amount of retirement savings sitting in DC plans – to the tune of $4.7 trillion – but fund managers only seem interested in investments that, unlike private equity, offer short-term liquidity. One way that firms might make inroads into DC plans, according to Mr Albert, is through target-date funds (TDFs). In the retirement savings context, a TDF provides DC plans with a simple investment solution: a portfolio whose asset allocation becomes more conservative as an individual's retirement date approaches. Some adjustments to the traditional private equity model would need to be made to fit the bill, but TDFs just might be the light at the end of the tunnel.

There is a widely-held view in private equity that the industry outperforms public equities – but does this still hold true? Perhaps not, according to the numbers presented by Tim Jenkinson (Professor of Finance, Private Equity Institute, Said Business School, University of Oxford). Looking at the Public Market Equivalent (PME), a measure of how LPs did compared to the S&P500, we see that every vintage year after 2005 is performing in line with, or just below, public securities. Professor Jenkinson was quick to note that these figures are only current estimates and there is still time for the numbers to improve. From another angle, he added, these figures demonstrate the impressive ability of the managers who handled the highly leveraged deals of their LBO funds through the turmoil of the global financial crisis (GFC).

The next correction: the question, of course, is not whether we will have one, but how soon it will come. David Rubenstein (Co-Founder & Co-CEO, The Carlyle Group) first took us through the lessons learnt from the last one. He posited that we are now a more robust industry, compared to pre-GFC, for the following reasons:

  • a greater amount of assets under management;
  • a more diversified, and global, investor base;
  • higher equity contributions to LBOs;
  • increased percentage of covenant-lite debt;
  • LPs' return expectations have decreased due to the current macroeconomic environment;
  • firms have more diversified fund strategies and are better capitalised;
  • government regulators are now more familiar with private equity and its value to economies.

Interestingly, Mr Rubenstein and Professor Jenkinson both pointed out that the illiquidity of private equity, usually seen as a drawback for the industry, mitigated any run on funds and gave skilful managers the chance to work through the downturn. Moreover, since emerging from the GFC, private equity has taken a stronger position and is growing faster than the remainder of the alternatives industry. Finally, Mr Rubenstein disclosed that the conventional wisdom of leading economists is that a correction is unlikely to occur in 2016 but, in any event, he seems cautiously optimistic about how the industry will weather the next storm.

Related articles: 

Summary of SuperInvestor 2015 Main Conference Day 1

Summary of SuperInvestor 2015 Main Conference Day 3

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